The A2 Milk Company (ASX:A2M) recently conducted its Annual General Meeting (AGM), maintaining its guidance amidst a backdrop of uncertainty. While the need for a significant 2H21 improvement is acknowledged, positive signs of recovery in corporate daigou demand and improvements in daigou channel inventory offer a glimmer of hope.
Revised Forecast and Investment Outlook
Forecast Adjustments
In response to prevailing uncertainties, our forecasts have been recalibrated. Despite A2M's guidance, we've adjusted our FY21 EBITDA forecast approximately 4% below the lower end of its guidance range, reflecting a cautious stance.
Investment Recommendation
Despite the prevailing uncertainty, we maintain an Add rating for A2M. While near-term earnings uncertainty may exert pressure on the company's share price, we remain optimistic about its medium to long-term prospects.
Maintained Guidance with Qualifications
Overview of 1H21 and FY21 Guidance
A2M has upheld its 1H21 and FY21 guidance as previously stated. 1H21 revenue is anticipated to be NZ$725-775 million, showing a decline of 4-10% compared to 1H20. FY21 revenue guidance stands at NZ$1.8-1.9 billion, with an EBITDA margin of approximately 31%, translating to EBITDA of NZ$558-589 million.
Dependency on 2H21 Improvement
Acknowledging the uncertain forecast, A2M stresses the necessity of substantial improvement in 2H21 (16-22% revenue growth compared to 2H20). This period's performance hinges on critical factors such as the daigou channel's improvement and sustained growth in China labeled products through the MBS channel.
Regional Updates
ANZ Region
A2M underscores the challenging trading conditions in 1H21, particularly due to the contraction in the daigou/reseller channel, exacerbated by Victoria's Stage 4 restrictions. However, recent weeks have shown initial signs of recovery in the corporate daigou, following the launch of incentive programs and the relaxation of lockdown measures in Victoria.
Asia Region
Sales growth in the MBS segment remains robust, driven by an expanded distribution footprint and increased sales velocities. The company's performance during the 11/11 sales event met expectations, with notable increases in English label IF sales volume.
North America Region
A reduction in FY21 EBITDA loss compared to FY20 is anticipated, aligning with previous forecasts.
Forecast Adjustments
Considering the uncertain 2H21 recovery, our revised forecasts stand below the guidance, projecting revenue of NZ$1,731 million and EBITDA of NZ$537 million for FY21.
Navigating Uncertainties Towards Growth
While uncertainties linger, A2M's comments on the improving daigou channel inventory offer a ray of hope. We view the current challenges as transitory, with A2M's robust balance sheet and quality growth trajectory underpinning our confidence in its long-term potential.
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